Tuesday, February 11, 2014

Cents, Peppercorns, and Continued Employment ... a Lesson on Consideration

I'm happy to report that the Polar Vortex hasn't sufficiently paralyzed the courts to justify taking any snow days in the last week, so I've been a busy little beaver.  One of the things that I've come across on more than one occasion recently is "consideration."  Ugh, I know.  The dreaded topic (at least for me) from first-year contracts class.  You remember, right?  "A bargained-for exchange."  What do law professors really think they are teaching when they use such language to describe such a basic concept?  I digress ... 
 
Let's break it down: consideration is the thing that is exchanged between the parties that gets a deal done.  It is one thing of value in exchange for another.  A key component of any contract, a deal dies when consideration is absent. 
 
Money is easy - obviously it is valuable.  Money for professional services.  Money for goods.  Consideration is readily identified in contracts such as these.  
 
What about forbearance?  Forbearance = not exercising a legal right.  This is the stuff settlement agreements are made of.  "I won't sue you for any claims I may have against you and everyone in your family, business, etc. from the beginning of time through the present" in exchange for something of value (usually money or desired goods).
 
Here's the thing about consideration - courts refuse to consider whether it is adequate.  It has long been the rule that "[a] cent or a pepper corn, in legal estimation, would constitute a valuable consideration."  Whitney v. Stearns, 16 Me 394 (1839).   
 
It is for this reason that in the non-compete context, a non-compete agreement will not fail for lack of consideration even when the employer asks the employee to sign it long after the employee is hired.  The law in Michigan (and  many other states as well) is that a promise of continued employment is more than enough to support a non-compete agreement.  These agreements are sometimes referred to as "afterthought" non-competes because they arise only after the employer spots a problem with employees leaving for competitors and tries to put non-compete agreements in place to solve it.  (Shameless plug: these types of employers really need a Non-Compete Counsel, no?).   
 
Is this fair to employees?  State senators in Michigan didn't think so and they drafted up Senate Bill 786, an amendment to Michigan's statute allowing for non-compete agreements.  Under that bill, employers who fail to require a non-compete agreement from a new employee don't get to ask for one later.  The text of the bill reads:
 
     An employer shall not require and a court shall not
enforce an agreement or covenant under this section as a condition
of employment if the employer did not inform the employee of the
requirement at or before the time of the initial offer of
employment.

It was no surprise to me that this bill died an early death - it never even made it out of committee.  After all, if a "cent or a peppercorn" is sufficient, not getting fired is clearly sufficient. 
 
But I think the bill died for another reason: it would discourage employers from promoting employees internally.  For all of my preaching about narrowly tailored agreements, such agreements are hard to write until an employee's value to a company is really known.  An employee who starts off with small sales numbers, for instance, but finds himself as a significant player two years into his employment, should clearly be considered a threat to his employer and required to sign a narrow non-compete agreement if he wants to keep his job.  A perfectly reasonable non-compete agreement under the statute would be invalidated simply because of the circumstances in which it arose.  That seems wrong.  Isn't it in everyone's best interest that such employees are promoted within the ranks of a company?  
 
Although the bill died more than a year ago, I bring this up now because I am seeing employers request established employees to sign non-competes more frequently now than ever before.  Mobility in the workplace is growing.  People are moving around and employers are nervous.  They are taking action to protect themselves. Good for them. 
 
My advice to employers with employees who won't sign such agreements?  Tell the employee he can keep his job, and he can have a cent and a peppercorn for his trouble.  Then send him to bed without dinner and order him to get to work on time in the morning. 
 
Liza Favaro 
Non-Compete Counsel 
 


* Disclaimer: The ideas and opinions shared on this site are my own and are not attributable to my employer. No amount of interaction on this site will create an attorney-client relationship. If you have a legal question and you ask it here, I will also answer it here (if I can), but such answers do not guarantee results and do not create an attorney-client relationship. If you wish to contact me directly, you may do so at efavaro@gmhlaw.com.


 
 
 

  

2 comments:

Jennifer said...

Any thoughts on the applicability of this rule to term employment, where the employee cannot quit or be fired without cause or good reason, and thus continued employment offers no new consideration for either a non-compete or an employment agreement modification, for example? I've argued this before, but found it had not been addressed much by the courts.

liza favaro said...

Jennifer -

Thanks for the comment! It's good to know there are readers out there!!

You raise a good point. I think consideration would fail in the circumstance you describe. The employer has a pre-existing duty NOT to fire the employee without good cause, so what else is the employee getting in exchange for the non-compete? Even a small amount of money would clearly take care of the problem. This is why the statute proposed in Michigan was a bad idea. Even if there was a bonus given as consideration for the non-compete, it might not be upheld under a statute requiring that the non-compete be obtained at the start of the employment relationship.